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The Big Bet on YM BioSciences

Incyte (Nasdaq: INCY  ) and Novartis' (NYSE: NVS  ) ruxolitinib has a clear lead over YM BioSciences' (AMEX: YMI  ) CYT387, but that hasn't stopped investors from making a bet on the YM BioSciences myelofibrosis drug.

How the bet wins, how it loses
Myelofibrosis is a disease where bone marrow stem cells go haywire and produce scar tissue that replaces healthy bone marrow. One of myelofibrosis' hallmarks is an enlarged spleen, which CYT387 seems to conquer fairly well, based on early data. In addition, CYT387 also reduces anemia, which myelofibrosis patients get. Ruxolitinib hasn't been shown to do that, and may even increase it.

Full results from YM BioSciences' phase 2 trial are scheduled to be presented at the American Society of Hematology's annual meeting in December. The complete data might help a little, but in order to win this bet, investors need CYT387 to work in a larger phase 3 trial.

Keep in mind that any large bump in the share price will likely invoke a capital raise by the company. YM BioSciences has a $125 million shelf filed with the SEC to sell additional shares on a moment's notice.

YM BioSciences could also score a win if the Food and Drug Administration fails to approve ruxolitinib. The agency is due to make a decision about the drug by Dec. 3, so investors won't have to wait too long before knowing if it could score a win that way. In fact, the oncology division is running ahead of schedule -- Roche, Seattle Genetics (Nasdaq: SGEN  ) , Adventrx Pharmaceuticals (AMEX: ANX  ) , and Pfizer (NYSE: PFE  ) all got early decisions  -- so waiting until close to the PDUFA date to jump in wouldn't be advisable.

On the flip side, I'm not sure a ruxolitinib approval is a major downside risk. The approval of a competitor by the time CYT387 gets to the market is already priced into the stock.

The biggest downside risk for CYT387 is probably that a side effect will pop up and sink the entire program. Obviously, not being able to reduce anemia would be disappointing, but if all CYT387 does is reduce spleen size, it can get on the market. It won't be easy for CYT387 to compete with ruxolitinib if it isn't differentiated and comes on the market years later, but investors can worry about that later.

YM BioSciences also has two other drugs in development. While CYT387 and its battle with ruxolitinib is getting most of the attention -- and for good reason -- the other drugs provide a little backstop should things go horribly wrong.

Upside galore
How much could YM BioSciences increase if investors were convinced that the drug works and can compete with ruxolitinib? Even factoring in dilution from secondary offerings, something close to a ten-bagger over the next few years doesn't seem out of the question. Incyte is valued at about $2 billion, about 10 times YM BioSciences' current market cap.

At the moment, YM BioSciences isn't one of those biotechs with a clear binary event to jump in ahead of. The full data from the phase 2 trial might propel the stock forward, but investors aren't going to be fully convinced that the drug works until the company has phase 3 data, which hasn't even been started yet.

If you like what you see and you're willing to hold for years, keep the company on your watchlist and buy on the dips.

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Pfizer and Novartis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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